An Avoidable Crash in Car Loans

Congressional Republicans never wanted the Consumer Financial Protection Bureau and have been trying to weaken the agency ever since it was created under the Dodd-Frank financial reform law of 2010. They’re likely to intensify their efforts next year with Donald Trump in the White House.

If successful, they will enfeeble an agency that has proved its worth time and again. In the past five years, the bureau has forced lenders to provide $11.7 billion in restitution and relief to 27 million consumers for illegal practices involving mortgages, foreclosures, credit cards, student loans, payday loans and other forms of credit.

In fact, more federal regulation of consumer financial services is needed, not less. A case in point is subprime car loans marketed to people with low credit scores. The Federal Reserve Bank of New York recently expressed “significant concern” over rising delinquencies in such loans; roughly six million borrowers are on the verge of losing their cars. That delinquencies are increasing even as the jobless rate declines suggests that lenders are loosening their standards in order to “qualify” borrowers for more debt than they can afford. In the world of subprime auto loans, which are usually made by nonbank finance companies, interest rates can reach up to 30 percent — an annual rate so high that a lender can turn a profit even when many borrowers default. In addition, lenders, rather than holding on to the loans, which could expose them to losses, often package them into securities and sell them to investors hungry for the high yields they offer. The parallels to subprime mortgage lending are inexact; the mortgage market, for example, dwarfs auto lending. But the similarities, including lending on loose terms to unsophisticated buyers, warrant serious concern.

What can the consumer bureau do? The answer is, not much, and that is a big reason subprime auto lending is so troubling. Congress gave the bureau authority over banks and nonbank finance companies. But it did not give the agency authority over auto dealers. Auto dealers, who tend to be prominent constituents in most congressional districts, lobbied successfully to be exempted from regulation by the bureau. That special treatment has meant relatively weak oversight of auto lending, because many auto loans, though financed by regulated lenders, are arranged by dealers, who often have discretion over most loan terms.

A bust in subprime auto lending, when it happens, won’t shatter the economy as the mortgage bust did. But it will harm millions of Americans. More and better financial oversight could help to avoid this outcome, but Congress is intent on moving in the opposite direction.